I can trade gold stocks via the exchange-traded fund Market Vectors Gold Miners ETF (NYSEARCA:GDX). Luckily, it carries options like a regular stock. And if that’s not enough, another ETF in the same vein is Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEARCA:JNUG).
Click to Enlarge The difference between the two is that the JNUG is a 3x leveraged miners ETF. It provides triple the returns of the GDX. So, if its related fund, Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) loses 1%, JNUG should theoretically lose 3%.
On this up day, I have to take into account the risk that is now baked in the gold stocks. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) recently broke down from the $125-per-share level, which had been support. This was technically predictable; $122 per share was in the cards, yet it slightly overshot that number.
Click to Enlarge Now GLD is trying to address the range as potential resistance, meaning that this rally may face some downside pressure soon.
Gold tends to be a fear trade — traders flock to buying GLD for protection against an event. We saw this unfold recently on election fears.
We could see it repeat, perhaps by the long-anticipated December rate hike.
Trades for Gold Stocks JNUG and GDX
Trade No. 1 — The Bet: Buy the JNUG Dec 23 $13 call for $2.25 per contract or better. To be completely successful, I only need JNUG to rally from current levels by mid-December.
To hedge my out-of-pocket risk I will add another side to this trade. Just note that premiums are jumping around, so I’d bid lower than the middle, then walk it higher until it fills.
Click to Enlarge Trade No. 2 — The Bank: Sell the GDX Nov $22/$21 credit put spread for 16 cents per contract or better.
To be successful, I need GDX to stay above my sold spread through its expiration in mid-December. The 12% buffer is smaller than ideal, with only 80% theoretical chance of success. But it looks like the bulls defended the $22 per share level well recently.
If I take both trades, I can be long gold miners for free. While I would need a rally in JNUG past my bought call to really profit, I would still have the chance of profit even if JNUG stalls here. Any premium I collect from selling the JNUG call would be profit since I financed them with the GDX trade. The assumption here is that GDX holds higher than my credit put spread sold.
I am not required to hold either trade through expiration. I can close either for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
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